Magazine

Why Asia Will Eat Our Lunch

The Good A clear, unbiased, and scary look at the threat that China and India pose to the U.S. economy.

The Bad It may be a tad pessimistic, given the author's tendency to assume current trends will continue.

The Bottom Line A persuasive argument that Washington's disdain for industrial policy is shortsighted.

Clyde Prestowitz says he had a revelation in 2003 when his oldest son, a software developer living on Lake Tahoe in California, asked him to co-invest in a snow-removal company. Why, wondered Prestowitz, would his high-tech offspring go into a business "as mundane as snow removal?" Explained the son: "Dad, they can't move the snow to India."

It's an example of the angst spreading among America's technology professionals as they watch India snare big chunks of the U.S. services sector while China runs off with America's manufacturing patrimony. His son's fears, Prestowitz asserts in Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, are all too rational.

Actually, Prestowitz didn't need the heads-up from his son. He has been mulling over America's competitiveness problems for 30 years, most recently as head of his own think tank -- the Economic Strategy Institute in Washington. Before that he was an international executive for U.S. multinationals, a trade negotiator in the Reagan Administration, and author of a ground-breaking, although ultimately alarmist, 1988 book about U.S.-Japan relations, Trading Places. Prestowitz writes with clarity, historical perspective, and an uncommon ability to extricate himself from the intellectual straitjackets that hobble so many Washington economic policymakers. Free trader or protectionist? Democrat or Republican? Keynesian or supply-sider? He doesn't fit in any of those boxes.

Governments have long been creating comparative advantages for their own economies, Prestowitz notes, but U.S. policymakers have apparently forgotten this. Despite today's fashionable disdain for industrial policy, Washington was once an active participant in boosting the gross domestic product. The federal government created Radio Corporation of America and established U.S. dominance in radio technology, launched Boeing (BA) and nurtured it with government contracts, and created AT&T (T) and its genius pool at Bell Laboratories (B), cradle of microelectronics. Then there's the Internet. "The apparently effortless technological supremacy Americans assume as a birthright...had nothing to do with market forces and everything to do with targeted policy decisions," Prestowitz notes.

Prestowitz also challenges one of the most popular and soothing myths in Washington -- that U.S. workers can compete with any in the world if given "a level playing field." The truth: Western workers won't be able to compete without accepting wage cuts, since, in the area of labor costs, China enjoys a "fifteen to thirtyfold advantage" over the developed world.

China and India, which together accounted for 75% of the world's GDP before the discovery of America, are on a steep trajectory to regain their prominence. "The potential size of their markets, their endless supply of low-cost labor, the unique combination of many highly skilled but low-paid professionals, and the investment incentives offered by their governments will constitute an irresistible package" that will soak up global investment.

Another central theme of the book is the value of "linkage" among technologies. Development of the VCR by Japanese companies led that country into the semiconductor business, Prestowitz says. Japan continues to understand the importance of linkage, while U.S. leaders seem not to: Contrast Sony Corp.'s (SNE) dogged efforts to link its PCs with TVs, camcorders, and other technologies to create a multimedia terminal with IBM's (IBM) sale to China's Lenovo Group Ltd. (LNVGY) of its laptop business. Which is the better strategy?

India, meanwhile, is moving rapidly up the value chain with its emphasis on software and computer services, along with processing of tax returns, medical X-rays, and the like. Want a new kidney or a hip? Visit one of India's high-tech "medical tourism" hospitals and get the procedure for less than half the cost in the U.S. or Canada, even figuring in the airfare. Surprisingly, there are already more info tech engineers in Bangalore (150,000) than in Silicon Valley (130,000).

There is reason for hope, Prestowitz allows. America's technology is often the best, as are its universities. The U.S. leads in biotech, and it retains an entrepreneurial culture. That said, Prestowitz still could be too pessimistic. As with Trading Places, he tends to project current trends far into the unknowable future.

But the U.S. government is dangerously shortsighted. The country's savings rate, secondary-education system, energy and water conservation, critical infrastructure, research investment, and worker training lag behind those in too many other nations.

You won't want to pick up Prestowitz' book if you seek reassurance that America is going to stay No. 1 -- because, dammit, we just are, Bud! In fact, as he points out, even as U.S. scores in math sink, American high school students continue to think that they are ranked first. Depressing, but if all else fails, remember: There's always snow removal.